Further on U.S. Sentencing Commission Proposal for Unclaimed Credits, Deductions and Exemptions (8/10/13)

I previously wrote on the proposal adopted by the U.S. Sentencing Commission regarding unclaimed deductions and credits.  See Sentencing Guideline Amendment on Unclaimed Credits, Deductions and Exemptions (Federal Tax Crimes 4/13/13), here.  I thought I would do an update here, based on USSC Amendments to the Sentencing Guidelines (4/30/12) (compilation of the unofficial text of the amendments), here.

Readers will recall that there was a circuit conflict as to whether, for purposes of computing the tax loss (the principal determinant in the sentencing calculation), the taxpayer could claim legitimate but previously unclaimed credits, deductions and exemptions.  The circuit split, with citations, is summarized well in the linked compilation.  The compilation then summarizes the proposal adopted by the Commission (pp. 22- 28):

The amendment resolves the conflict by amending the Commentary to §2T1.1 to establish a new application note regarding the consideration of unclaimed credits, deductions, or exemptions in calculating a defendant's tax loss. This amendment reflects the Commission's view that consideration of legitimate unclaimed credits, deductions, or exemptions, subject to certain limitations and exclusions, is most consistent with existing provisions regarding the calculation of tax loss in §2T1.1. See, e.g., USSG §2T1.1, comment. (n.1) ("the guidelines contemplate that the court will simply make a reasonable estimate based on the available facts"); USSG §2T1.1, comment. (backg'd.) ("a greater tax loss is obviously more harmful to the treasury and more serious than a smaller one with otherwise similar characteristics"); USSG §2T1.1, comment. (n.1) (allowing a sentencing court to go beyond the presumptions set forth in the guideline if "the government or defense provides sufficient information for a more accurate assessment of the tax loss," and providing "the court should use any method of determining the tax loss that appears appropriate to reasonably calculate the loss that would have resulted had the offense been successfully completed"). 

The new application note first provides that courts should always account for the standard deduction and personal and dependent exemptions to which the defendant was entitled. The Commission received public comment and testimony that such deductions and exemptions are commonly considered and accepted by the government during the course of its investigation and during the course of plea negotiations. Consistent with this standard practice, the Commission determined that accounting for these generally undisputed and readily verifiable deductions and exemptions where they are not previously claimed (most commonly where the offense involves a failure to file a tax return) is appropriate. 

The new application note further provides that courts should also account for any other previously unclaimed credit, deduction, or exemption that is needed to ensure a reasonable estimate of the tax loss, but only to the extent certain conditions are met. First, the credit, deduction, or exemption must be one that was related to the tax offense and could have been claimed at the time the tax offense was committed. This condition reflects the Commission's determination that a defendant should not be permitted to invoke unforeseen or after-the-fact changes or characterizations — such as offsetting losses that occur before or after the relevant tax year or substituting a more advantageous depreciation method or filing status — to lower the tax loss. To permit a defendant to optimize his return in this manner would unjustly reward defendants, and could require unjustifiable speculation and complexity at the sentencing hearing.

Second, the otherwise unclaimed credit, deduction, or exemption must be reasonably and practicably ascertainable. Consistent with the instruction in Application Note 1, this condition reaffirms the Commission's position that sentencing courts need only make a reasonable estimate of tax loss. In this regard, the Commission recognized that consideration of some unclaimed credits, deductions, or exemptions could require sentencing courts to make unnecessarily complex tax determinations, and therefore concluded that limiting consideration of unclaimed credits, deductions, or exemptions to those that are reasonably and practicably ascertainable is appropriate. 

Third, the defendant must present information to support the credit, deduction, or exemption sufficiently in advance of sentencing to provide an adequate opportunity to evaluate whether it has sufficient indicia of reliability to support its probable accuracy. Consistent with the principles set forth in §6A1.3  [*23]  Resolution of Disputed Factors) (Policy Statement), this condition ensures that the parties have an
adequate opportunity to present information relevant to the court's consideration of any unclaimed credits, deductions, or exemptions raised at sentencing.  

In addition, the new application note provides that certain categories of credits, deductions, or exemptions shall not be considered by the court in any case. In particular, "the court shall not account for payments to third parties made in a manner that encouraged or facilitated a separate violation of law (e.g., 'under the table' payments to employees or expenses incurred to obstruct justice)."  The Commission determined that payments made in this manner result in additional harm to the tax system and the legal system as a whole. Therefore, to use them to reduce the tax loss would unjustifiably benefit the defendant and would result in a tax loss figure that understates the seriousness of the offense and the culpability of the defendant. 

Finally, the application note makes clear that the burden is on the defendant to establish any credit, deduction, or exemption permitted under this new application note by a preponderance of the evidence, which is also consistent with the commentary in §6A1.3.

As reported in the prior blog, the text of the key changes is (pp. 26-27):

Application Notes: 

3. Unclaimed Credits, Deductions, and Exemptions.—In determining the tax loss, the court should account for the standard deduction and personal and dependent exemptions to which the [*27] defendant was entitled. In addition, the court should account for any unclaimed credit, deduction, or exemption that is needed to ensure a reasonable estimate of the tax loss, but only to the extent that (A) the credit, deduction, or exemption was related to the tax offense and could have been claimed at the time the tax offense was committed; (B) the credit, deduction, or exemption is reasonably and practicably ascertainable; and (C) the defendant presents information to support the credit, deduction, or exemption sufficiently in advance of sentencing to provide an adequate opportunity to evaluate whether it has sufficient indicia of reliability to
support its probable accuracy (see §6A1.3 (Resolution of Disputed Factors) (Policy Statement)).  

However, the court shall not account for payments to third parties made in a manner that encouraged or facilitated a separate violation of law (e.g., "under the table" payments to employees or expenses incurred to obstruct justice). 

The burden is on the defendant to establish any such credit, deduction, or exemption by a preponderance of the evidence. See §6A1.3, comment.